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Risk Management for Small Business

  • Risk management is vital for preserving your company in the face of unexpected circumstances
  • Understand different scenarios for internal and external risks
  • How to develop a risk management plan, and prepare for unpredictable risks

By Denis Jakuc

Risk management is vital to the success of any company. An unexpected occurrence of any kind can seriously damage a business, or even destroy it completely.

There are two types of risk a business can face: external and internal. Think of internal risks as weaknesses, and external risks as threats. In general, you can control internal risks once you identify and either mitigate or eliminate them. But external risks may be out of your control; your only option may be able to react to them when they happen, to minimize disruption.

It is worth noting that risks do not always have negative causes. For example, they may come from opportunities to grow the business, which can create situations that bring additional risk. The goal of risk management is to minimize the effects any of these risks could have. Here are some examples of both internal and external risks.

Internal risks

Human risks

  • Losing a key employee for an extended period of time through illness, or permanently if they leave the business, retire, or pass away
  • Theft and fraud, including timecard fraud, theft of equipment and supplies and diverting funds to fictitious accounts
  • Poor employee morale that can cost your business money through negligence or willful acts—e.g., someone who forgets to reorder inventory is risking sales because customers will cancel rather than wait for back orders

Equipment and IT risks

  • Outdated equipment may run inefficiently, break down, or be vulnerable to hackers
  • New equipment may have to be modified to work with existing systems
  • Information technology can be subject to hardware, software, and network failures, viruses and cyberattacks

Other internal risks

  • Maintenance issues with your physical plant
  • Problems with phone lines or other utilities
  • Weather damage
  • Liabilities from selling a faulty product
  • Challenges to cash flow stemming from unexpected costs
  • Reduction or loss of your credit line
  • New financing costs (appraisals, closing, points to buy down rates, deposits held as collateral)

External Risks

Market Risks

  • New competitors
  • New tactics from existing competitors—sales, extended warranties, etc.
  • Employees going to a competitor and taking customers with them

Business environment risks

  • New regulations and ordinances at federal, state, or local levels
  • Natural disasters that can temporarily or permanently close your business
  • Changes in the community that affect customer needs, age groups, spending habits, incomes, and the overall quality of your business environment
  • Rent and other cost increases

Personal conflict risks

  • Family medical emergencies
  • Unexpected home repairs and maintenance
  • Family obligations
  • Staff complacency, causing the business to miss growth opportunities

Creating a risk management plan

The risks a company faces and how it responds to those risks will vary from business to business. However, the way for every business to be ready to manage their risks is to put together a plan. Here are some steps to take.

Limit your personal liability

If you’re a sole proprietor, limit your personal exposure by becoming a corporation, or a limited liability company (LLC), which prevents you from being held personally liable for the business’s debts or other liabilities.

Prioritize

Rate each internal weakness and external threat according to the likelihood of its happening: very likely, some chance of occurring, small chance of occurring, very little chance of occurring. However, if a less likely risk has the potential for greater financial damage, it should be given priority.

Purchase insurance

Insurance transfers your risk to an insurance company for a small cost when compared to the potential cost of an uncovered risk. Types of insurance include: professional, life, disability, and completed operations insurance. Some may be required for your business.

Control growth

If your growth goals are too ambitious, employees might be tempted to use high-pressure sales tactics which put off customers, or take unnecessary risks with what they promise. You also don’t want to grow faster than you can hire and train good employees to handle the added work.

Finally, be careful of innovating too rapidly. Innovation can feed growth, but, remember, not all new products or services will be successful.

Create a quality assurance program

A major risk to your business is losing your reputation for quality, reliability, and value. Set up a program to keep evaluating your products and services, and make adjustment to maintain your standards. Customer service is equally important, so set up a system to track your company’s performance in that area.

Manage high-risk customers

Put in place a procedure to identify customers who are poor credit risks. Then insist they pay in advance.

Establish a risk management team

If you have the budget, hiring an outside risk management team can be a worthwhile investment. These professionals will uncover all your risks based on your type of business, then set up strategies to implement if those risks become reality. They can contribute a lot to prevent risks from happening and mitigate their impact when they do.

If you can’t afford to hire professionals, assign staff to function as a risk management team and come up with ways to lower risks and respond to them when they happen. Ideally, someone on this team would have experience in the area and could act as the leader.

Unpredictable risks and how to handle them

If your company has a partnership, you need to anticipate the possibility of one of the partners dying or becoming incapacitated. The partnerships should equitably recognize the subsequent division of assets.

The Great Recession and the COVID-19 pandemic are examples of major crises that bankrupted many businesses. In such cases, the only remedies are a strong balance sheet, which means substantial liquidity, or radical actions to quickly reorganize to capitalize on other market approaches.

For example, restaurants found themselves unable to offer in-person dining for months after the COVID-19 pandemic began, and often responded by starting or expanding takeout or delivery options. This strategy allowed them to continue operating, cover expenses, and sometimes even make a profit.

During major disruptions, explore local and national options for relief. Millions of businesses were able to stay afloat during the pandemic through the Paycheck Protection Program, Economic Injury Disaster Loan program, and other funding options.

Conclusion

Risk management is key to the sustainable success of your business. Putting a risk management plan in place will help ensure that success. The steps covered above are good starting points. But don’t hesitate to take a deeper look into your business and industry to make sure you cover all the risks that may be there.

 

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This Expert Summary is © InnovatorsLINK. For republishing, please contact dlangeveld@innovatorslink.com.

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